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An Insatiable Appetite for Trophy Assets

Investment sales activity is occurring at a frenzied pace. Nearly $70 billion worth of Class-A office buildings were sold during the first half of 2004 — a 60% increase in sales volume over the same period last year, reports New York-based Real Capital Analytics.

“This is the most liquid office sales market I've ever seen because we finally have sellers out there and there's a lot more activity on tap,” says Bob White, president of Manhattan-based Real Capital Analytics, which tracks sales of $5 million or higher. Nearly $13.9 billion of office product was put on the market in the first half of 2004 compared with $10.8 billion during the second half of 2003.

So what's behind this flood of new offerings? White credits two factors — buyers bent on exploiting low interest rates and sellers determined to catch the market at its peak. The 10-year Treasury yield registered 4.3% in early August, which in historical terms remains not far from record lows. And although the one-month LIBOR (London Interbank Offering Rate, the interest rate that the banks charge each other for loans) rose from 1.11% to 1.53% during the 12 months that ended Aug. 11, debt is still remarkably cheap.

Well-leased, Class-A office buildings in markets such as Houston, Atlanta, Manhattan and South Florida continue to drive demand. The sheer number of sales in these markets doubled during the first half of this year, and record prices were set this year in 16 of the top 50 markets. Activity in the Southeast surged 144% during the first half of the year compared with the same period in 2003. The Florida markets are attracting plenty of investor interest, says White, while the Atlanta investment sales market is rebounding.

Case in point: the Pinnacle, a 423,000 sq. ft. Atlanta office building, sold in August for $343 per sq. ft., the most ever spent on an Atlanta office building. Pension fund TIAA-CREF paid owner Cousins Properties $145 million for the building.

The number of deals won by institutional players also jumped significantly during the first half of 2004. It's still a seller's market as the new offerings are priced aggressively, White says. Take midtown Manhattan's 125 Park Avenue, which sold in mid-July to Shorenstein Co. for $225 million. Seller Watch Holdings, a subsidiary of General Electric, bought the 575,000 sq. ft. property in 1998 for roughly $82 million. The property is nearly 100% occupied.

One of the bidding teams was a partnership between Joseph Chetrit and Joseph Moinian, the aggressive Manhattan-based private investors who snagged the Sears Tower earlier this year for $840 million. San Francisco-based Shorenstein, which manages office properties for institutional investors, outbid the formidable Chetrit/Moinian team in winning the property.

White says that institutional investors are not only winning more deals this year than in 2003, they are also bidding more aggressively. Meanwhile, sellers are favoring institutional players who are typically all-cash buyers. To sellers, there is also less risk of an institutional buyer re-trading a deal, or dropping the contract, if interest rates rise suddenly.

Investment sales broker Woody Heller of Manhattan-based Studley continues to see fresh sellers debut on the national market. Heller represented Watch Holdings on the sale of 125 Park Avenue. “This is the classic example of prices getting to be very high throughout the market,” says Heller. “And because of that, we're seeing a huge jump in transaction volume here in Manhattan.”

Heller isn't holding his breath that this will change, either. “For one thing, the second half of every year tends to be busier than the first,” says Heller. “My prediction is that pricing will remain strong as there are many active buyers in the market.”